SEC Insights - March 2014

Revenue Recognition Exposure

Since May 2002, the Financial Accounting Standards Board (“FASB”)
has been working with the International Accounting Standards Board
(“IASB”) to converge on revenue recognition standards. On January
4, 2012 an Exposure Draft, Revenue from Contracts with Customers,
was published by the FASB and open for comment through March 13, 2012.
The last update made to the draft was on July 24, 2013 when the FASB
and IASB reached an agreement on several areas of the project.
The staff is currently in the process of drafting a final revenue
standard expected to be issued later this year.

Revenue is a critical area to users of financial information in
determining a Company’s financial performance.In current practice,
differences exist between revenue recognition for financial statements
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) and those prepared under International Financial
Reporting Standards (“IFRS”).

Old Standards

Current GAAP requires revenue to be recognized when
realized or realizable and earned under numerous standards, some of
which are noted below:

Under IFRS, current revenue recognition standards consist of only the following:

IAS 18, Revenue

IAS 11, Construction Contracts

Current GAAP standards are extremely detailed, by industry and
transaction, but have been developed over the past several years which
may result in inconsistent treatment for similar types of transactions.
On the other hand, IFRS standards are very high-level which can also
lead to inconsistencies in financial reporting applications.

Proposed New Standards

The new standards were developed with an intention to improve
comparability of revenue recognition across entities, industries, and
markets.

The proposed new revenue recognition standards are aimed at
simplifying the financial statement preparation process and focus on a
five step process to determine the amount of revenue to recognize for a
particular transaction.

Identify the contract with a customer

Identify performance obligations in the contract

Determine the contract price

Allocate the transaction price to the separate performance obligations in the contract

FASB is expected to create a new Implementation Group to assist
users with questions that arise in transitioning to the new standards.
Additionally, various illustrations and samples will be provided to
demonstrate the use of the new standards on specific types of
transactions throughout various industries.

Two methods of adoption will be allowed:

Transition will be permitted based on either the full retrospective or modified retrospective methods. Entities that choose to adopt the standard on a full retrospective basis would have to update all financial statement captions for all periods presented. Entities that use the modified retrospective approach would need to present comparative periods under the current revenue guidance. New guidance would be applied to new and existing contracts as of the effective date, and entities would need to recognize a cumulative catch-up adjustment to opening retained earnings at the effective date for existing or outstanding contacts. In addition, entities would be required to disclose all line items in the year of adoption as if they were prepared under current revenue guidance.

These new standards will have a minimal effect on entities with
simplistic sales transactions, such as straightforward retail
transactions.

On the other hand, industries that may significantly be impacted by
the new standards include software, real estate, and construction
companies whose sales include multi-deliverables, or delivery spans
over multiple reporting periods.

Proposed Disclosure Requirements

The proposed standards include new quantitative and
qualitative disclosure requirements to help readers of financial
information better understand the nature, timing and uncertainty of
revenue and cash flows from contracts with customer which include the
following:

Significant judgments and changes in judgments made in applying the new standards to contracts

Proposed Effective Date

The proposed revenue recognition standards are anticipated to be
effective for interim and annual reporting periods beginning after
December 15, 2016 for public companies and for periods beginning after
December 15, 2017 for non-public entities.

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